DR RAM MANOHAR LOHIA

NATIONAL LAW
UNIVERSITY

(Final DRAFT)

TOPIC liquidated and unliquidated damages in light of Dunlop

pneumatic tyre company V new garage and motor co.ltd.

1
SUBMITTED TO
SUBMITTED BY

Karan Rawat(66)

Dr. Visalakshi Vegasna

Karishma Verma(67) Dr. Rmlnlu (Lucknow)
2nd Semester Sec A

ACKNOWLEDGEMENT

Firstly, I would like to thank respected DR.VISALAKSHI VEGESNA for giving me such a
golden opportunity to show my skills, through my project.

The project is the result of extensive study; hard work and labour, put into make it worth reading.

I wish to acknowledge that in completing this project by receive help of my friends and
teacher .This project would not be completed without the help of my university library Dr.
Madhu Limaye library and through universitys online data base.

I am glad to make it

2
 TABLE OF CONTENT

I. Acknowledgement2
II. Introduction ...4
III. Liquidated damage 5
IV. Unliquidated damage. 5
V. Dunlop pneumatic tyre company Vs new garage and motor co.ltd. ..6
VI. Exclusion clauses and consequential or indirect loss..10
VII. Bibliography..11

3
Referred cases:

Cellulose Acetate Silk Co. V Widens Foundry

Philips Hong Kong Ltd. V. The Ag Of Hong Kong
Clyde Bank Engineering And Shipbuilding Co. Vs Don Jose Ramos Yzquierdoy
Casteneda
Public Works Commissioner Vs. Hills
Thomas P Gonzalez Corp. V F R Waring (International ) PvtLtd.
Elphinstone V Monkland Iron Coal Co.
Kemble V Farren
Webster V Bosanquet.

4
Introduction

The parties to a contract may determine beforehand the amount of compensation payable in the
event of breach. If the sum fixed represents a genuine pre- estimate of the probable damage that
is likely to result from the breach, it is liquidated damages. A sum less than the amount of
probable damage are also regarded as liquidated damages. The whole of such sum is
recoverable1 Parties entering a contract are entitled to create mutual rights and duties by
agreement. What the parties have agreed should normally be upheld. Any other approach will
lead to undesirable Parties entering a contract are entitled to create mutual rights and duties by
agreement. Uncertainty especially in commercial contracts2 . If there is a dispute between the
parties as to what is covered and the matter turns on the wording of the contract, there will be
variations between jurisdictions depending on the issue in dispute. There is a wide variety of
agreed remedies and the main types relate to financial payments. Despite the general principle of
freedom of contract, there are various rules that involve a balancing of values, and relief is given
on the basis of fairness. A manufacturer of tyres supplied a quantity of tyres to a dealer on the
condition that they would not be sold below the list prices and that liquidated damages of $ 5
would be payable for every tyre sold in breach of the agreement. The dealer committed breach.
The question was whether the above sum was intended as a genuine compensation for the loss
suffered. If the sum fixed by the parties is found to be liquidated damages, the whole of it is
recoverable .but if it is viewed as penalty ,it is rejected .damages will then be calculated
according to the ordinary principles.

1 cellulose acetate silk co v widens foundry (1925) ltd,(1933) ac 20 ,apparently based upon
the principle that the parties have the right to limit their liability.

2 Philips Hong Kong Ltd v. The AG of Hong Kong (1993) 61 BLR 49 (PC) 59 (Lord
Woolf).

5
Liquidated damages

Liquidated damages (also referred to as liquidated and ascertained damages) are damages
whose amount the parties designate during the formation of a contract for the injured party to
collect as compensation upon a specific breach (e.g., late performance).When damages are not
predetermined/assessed in advance, then the amount recoverable is said to be 'at large' (to be
agreed or determined by a court or tribunal in the event of breach).At common law, a liquidated
damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach
rather than to compensate the injured party (in which case it is referred to as a penal or penalty
clause). One reason for this is that the enforcement of the term would, in effect, require an
equitable order of specific performance. However, courts sitting in equity will seek to achieve a
fair result and will not enforce a term that will lead to the unjust enrichment of the enforcing
party3

In order for a liquidated damages clause to be upheld, two conditions must be met.

First, the amount of the damages identified must roughly approximate the damages likely
to fall upon the party seeking the benefit of the term.

Second, the damages must be sufficiently uncertain at the time the contract is made that
such a clause will likely save both parties the future difficulty of estimating damages.

In the case of construction contracts, courts have occasionally refused to enforce liquidated
damages provisions, choosing to follow the Doctrine when both parties have contributed to the
overall delay of the project.

Unliquidated damages
3 "Liquidated Damages" (w), American Law Encyclopedia 6, retrieved 2009-04-07

6
Unliquidated damages refer to damages in a breach of contract case that were not predetermined
by the party. It can refer to any damages award a court awards in a breach of contract case. It is
most commonly used in contracts law. Under the law in the US and in most locations, parties can
create their own private law by creating a contract. Within the contract, each party exchanges
something of value with the other, even if that something of value is just a promise to do
something at a later date. The court will enforce the contract made by the parties and will
penalize a person who breaches said contract. When a breach occurs, damages are
appropriate. Damages are the amount of money necessary to put the plaintiff in the same position
he would have been in but for the breach.

Dunlop Pneumatic Tyre Company V New Garage And Motor Co.Ltd.

The appellants sold motor tyres, covers and tubes to the respondents dealers who agreed, inter
alia not to sell or offer the goods to any private customers or to any cooperative society at less
then the appellants current list prices, nor to sell to any person whose supplies the appellants had
decided to suspend and to pay the sum of 5 pound per tyre by way of liquidated damages for
every tyre cover or tube sold or offered in breach of the agreement. The respondents sold a tyre
cover to a cooperative society at less then the list price and the appellants claimed the agreed
sum.

Lord Dunedin expressed his views in the case:

I shall content myself with stating succinctly the various propositions which I
think are deducible from the decisions which rank as authoritative :-

1. Though the parties to a contract who use the word penalty on liquidated damages
may prima facie be supposed to mean what they say, the expression used is not
conclusive. The court must find out whether the payment stipulated isnt truth a
penalty or liquidated damages. This doctrine may be said to found passim in
nearly every case.

7
 2. The essence of a penalty is a payment of money stipulated as in terrorem of the
offending party: the essence of liquidated damages is a genuine convineted pre-
estimate of damage4
3. The question whether a sum stipulated this penalty or liquidated damages is a
question of construction to be decided upon the terms an inherent circumstances
of each particular contract judged of as at the time of the making of the contract
not as at the time of the breach5.
4. To assist this task of construction various tests have been suggested which if
appliocable to the case under consideration may prove helpful or even conclusive.

Four rules of construction-

It will be held to be a damages if the sum stimulated for is extravagant and

unconscionable in amount in comparison with the greatest loss that could conceivably be
proved to have followed from the breach. to quote a rather far fetched example, a
clause in a contract to do building work worth $50 would be penal if it provided that the
builder should pay $1 million if he failed to do the work6
It will be held to be a damage if the breach consists only 7 in not paying a sum of money
and the sum stipulated is a sum greater than the sum which ought to have been paid . a
clause making a debtor liable to pay $1000 if he failed to pay $50 on the due day would
thus be penal . one explanation formerly given for this was that the only amount
recoverable ,as damage for failure to pay money when due was interest ,when available
by statute or by special agreement 8but this reasoning is no longer convincing now that

4 Clyde Bank Engineering and Shipbuilding Co. vs Don Jose Ramos Yzquierdoy
Casteneda

5 Public Works Commissioner vs. Hills

6 Clydebank engineering co v don fose Ramos isquierdo y Castaneda (1905) a.c. 6

at 10

7 See Thomas p Gonzalez corp. v f r waring (international ) pty ltd(1980)2 Lloyd ,s

rep .160 at 163 (rule inapplicable where breach consists of buyer ,s failure to accept
and pay)

8
 special damage can be recovered for loss caused by such a breach 9alternatively it was
suggested that the rule was based on an equitable jurisdiction to reform unconscionable
bargains 10where the bargain is a fair one ,the courts are reluctant to apply the present
rule. In Wallis v smith 11$ 5000 was payable on any substantial breach of a contact was
that the defendant should pay $500 on signing the agreement .when the defendant wholly
repudiated the contract ,he was held for the $5000 .the court was able to escape from the
present rule by adopting a narrow construction of the clauses and holding that failure to
pay the $500 was not a substantial breach .
There is a presumption that a clause is penal when a single lump sum is made payable
on the occurrence of one or more or all of several events , some of which may
occurrence serious and others but trifling damage . under this rule ,a sum is not
presumed to be penal if it is expressly proportioned to the seriousness of the breach ,e.g.
if a lease provides for payment of $100 per acre 12of land not restored to its former
condition ,or if a contractor agrees to pay $500 per week for delay 13 such stipulations are
only penal if extravagant. On the other hand, a sum payable on one of several events will
be treated as penal if one of those events is the the non- payment of a smaller sum, 14or if

8 (1915) a.c 79 at 87.

9 See above ,para 20- 118

10 (1915) a.c. 79 at 87.

11 As in betts v burch (1859) 4 h @ n 506 .this case was decided in a common law court
before the jurisdiction acts 1873-75 ,but the same rule was recognized ,if reluctantly ,in the
chancery division after 1875 :Wallis v smith (1882) 21 ch.d. 243

12 Elphinstone v monkland iron coal co (1886) 11 app.cas.332.

13 Clydebank engineering case (1905) a.c. 6 ,Philips Hong Kong v attorney general of Hong Kong
(1993)61 build l.r. 41 .such a provision will not operate where the contract is totally abandoned (since if it
did so operate the payments would have to go on for ever ) :British glanzstoff mfg co v general
accident ,etc .co (1913) a.c. 143.

14 As in Kemble v farren (1829) 6 Bing .141, cf.duffin v frabo spa (2000) 1 lioyed, s rep.180 at 196.

9
 one event is bound to cause greater loss than become due on a trifling breach ,even
through the breach which actually occurred was quite a serious one and one for which the
sum could be regarded as a genuine pre-estimate 15in this way ,the rule can invalidate
perfectly fair bargains. The courts will do their best to avoid such results by construing
the contract so as to make the sum payable only on major breaches, for which it is a valid
pre-estimate16even where this construction is not possible ,it is submitted that the validity
of the clause should depend on what is likely to be its normal operation .it should not be
struck down merely because in extraordinary circumstances (which have not in fact
occurred ) the stipulated sum might greatly exceed the claimant ,s loss17
it is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the
consequences of breach are such as to make precise preestimation an impossibility .on the
contrary ,that is just the situation when pre-estimated damage was the true bargain
between the parties thus in Dunlop pneumatic tyre co ltd v new garage motor co ltd
itself the defendants bought tyres and agreed with the sellers that they would not (1)
tamper with the manufacturer ,s marks ;(2) sell to the public below listed price (3) sell to
any person suspended by the sellers .they further agreed to pay $5 to the sellers for
every tyre sold or offered in breach of the agreement. The defendant sold to the public
below list price. It was held that the provision for payment of $5per tyre was not penal
the presumption that a sum payable on several events was penal was rebutted by the
very fact that the damage caused by each and every one of those events ,however varying
in importance ,of such an uncertain nature that it can not be accurately ascertained but
even in such circumstances the sum will be penal if it is extravagant.

15 Ariston srl v charly records ltd.,financial times ,march 21, 1990

16 Webster v bosanquet (1912) a.c. 394 ;cf above ,at fn 763 ;Murray v leisure play plc(2005)ewca civ
963 ;(2005) i.r.l.r. 946 (where ,as a matter of construction ,the payment of one-year ,s salary paid ,short of
12 months)

17 See Philips ,Philips Hong Kong v attorney general of Hong Kong (1993)61 build l.r. 41

10
Effects of liquidated damages clause where stipulated sum intended to be
below the estimated loss

A clause may be intended to provide for payment of a sum below the estimated loss. Such a
clause is not valid as a penalty as its object is not to act in terrorem. In CELLULOSE ACETATE
SILK CO LTD V WIDES FOUNDRY LTD. 18a contract for the construction of an acetone
recovery plant provided that if completion was delayed the contractors were to pay by way of
penalty $20 per working week. The plant was completed 30 weeks late, during which period the
owners suffered losses of $5850 .it was held that they could recover $600 only. Both parties must
have known that the actual loss would exceed $20 per week, so that one object of the clause was
no limit the contractors liability .but it was not a pure limitation clause for the contractors would
still have had to pay $20 per week even if the owners had lost less. For this reason liquidated
damages clauses are probably not exemption clauses and so not subject to the unfair contract
19
terms act 1977 though they may in certain circumstances be subject to the unfair terms in
consumer contracts regulations 1994.

Exclusion clauses and consequential or indirect loss

The Court concluded that both the cost of removal and the loss of any profits which it would
otherwise have been earning were direct or natural consequences and were not covered by the
exemption clause which (since all recoverable loss is literally consequential) plainly uses
consequential as a synonym of indirect. Of the aspects discussed, the problematic words
consequential loss is frequently included in exclusion clauses and will affect the liability of the
parties. Parties do not enter their own contracts on the basis of what the words mean in other
contracts, and each particular contract should be viewed on its facts. The meaning attributed in
18 (1933 ) A.C. 20

19 See above Para 7-052

11
previous contracts should be irrelevant in deciding what an exclusion clause means. What is
required is a ruling from the courts at the highest level to ensure that the meaning is ascertained
by construction of the contract rather than a presumptive approach. Great care is required in
drafting any exclusion clause and parties should not utilize the words consequential or
indirect. If an exclusion clause is included the allocation of liability should be determined on
the basis of the contractual interpretation rules and in light of admissible background evidence.
Consequential loss should be treated as a matter of causation, but until there is a judgment of a
higher court the best way forward is to specify in exclusions clauses precise definitions of the
possible damages that are excluded or included.

Bibliography

Books

1) PEEL, EDWEEN. The Law of Contracts, 13th ed, Sweet and Maxwell South Asian
Edition.

2)SINGH,AVTAR. Contracts and specific relief, 11th ed., Eastern Book Company

Articles

12
Comparative analysis of some aspect of assessment of damage article written by MAREE
CHETWIN.

13